-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U8c6ehdcWvzQp8TFSphojnGqTsPFXRF6OqsOhFDwM7k3w7VsYbOsATkzLB9s0BlD 90u22GFuREXZQgQRaHtMQA== 0000810481-99-000002.txt : 19990402 0000810481-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000810481-99-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XXVII LP CENTRAL INDEX KEY: 0000810481 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 330214387 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17173 FILM NUMBER: 99580834 BUSINESS ADDRESS: STREET 1: 13760 NOEL ROAD STREET 2: SUITE 700 LB70 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144485800 MAIL ADDRESS: STREET 2: 13760 NOEL ROAD SUITE 700 LB 70 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHMARK PRIME PLUS L P DATE OF NAME CHANGE: 19920413 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to_____________ Commission file number 0-17173 ----------- McNEIL REAL ESTATE FUND XXVII, L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0214387 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (972) 448-5800 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited partnership units - ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 4,492,275 of the registrant's 5,162,909 limited partnership units are held by non-affiliates. The aggregate market value of units held by non-affiliates is not determinable since there is no public trading market for limited partnership units and transfers of units are subject to certain restrictions. Documents Incorporated by Reference: See Item 14, Page 43 TOTAL OF 45 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XXVII, L.P. (the "Partnership"), formerly known as Southmark Prime Plus, L.P., was organized by affiliates of Southmark Corporation ("Southmark") on January 16, 1987 as a limited partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act to make short-term loans to affiliates of the general partner. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Prime Plus Corp. (the "Original General Partner"), a wholly-owned subsidiary of McNeil. The Original General Partner was purchased from Southmark by McNeil on March 13, 1991, as discussed further below. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, Dallas, Texas 75240. The sole limited partner of the Partnership was initially Southmark Depositary Corp. (the "Depositary"), a wholly-owned subsidiary of Southmark. On August 14, 1987, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-11824) and commenced a public offering for sale of $100,000,000 of Depositary units. The sale of Depositary units closed on August 14, 1988, with 5,548,888 units sold at $10 each, or gross proceeds of $55,488,880 to the Partnership. The Partnership subsequently filed a Form 8-A Registration Statement with the SEC and registered its Depositary units under the Securities Exchange Act of 1934 (File No. 0-17173). The Depositary assigned the principal attributes of its aggregate limited partner interest in the Partnership to the Depositary unit holders. As further discussed, the Depositary units were subsequently converted to limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the limited partners to participate in certain allocations and distributions of the Partnership. As of December 31, 1998, 385,979 of the Units have been repurchased pursuant to the terms of the Amended Partnership Agreement. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, were sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates. On March 13, 1991, McREMI commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates. On March 30, 1992, the unitholders approved a restructuring proposal that provided for (i) the replacement of the Original General Partner with the General Partner; (ii) the adoption of the Amended Partnership Agreement which (a) substantially alters the provisions of the original Partnership Agreement relating to, among other things, compensation, reimbursements of expenses, and voting rights and (b) makes Depositary unit holders direct limited partners of the Partnership; (iii) the approval of an amended property management agreement with McREMI, the Partnership's property manager; and (iv) the approval to change the Partnership's name to McNeil Real Estate Fund XXVII, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee, retroactive to March 13, 1991, which is payable to the General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 - Certain Relationships and Related Transactions. The proposals approved at the March 30, 1992 meeting were implemented as of that date. Settlement of Claims: The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, which totaled approximately $17,024,326, for the full amount claimed and such settlement was approved by the Bankruptcy Court. Pursuant to the settlement agreement, the Partnership released Southmark and its affiliates and the Original General Partner from any further liability in connection with the claims made with the Bankruptcy Court. In return, an affiliate of McNeil agreed to waive payment on a dollar for dollar basis in an amount equal to the settled claims against Partnership advances owed at that time. In addition, the Partnership received Southmark bankruptcy plan assets in respect to its claims which were not offset against the Partnership advances. Because the Partnership's claims against Southmark were settled for $17,024,326, the Partnership advances of $223,800 owed at that time were reduced in their entirety and the claims had a remaining balance of $16,800,526. Although the Partnership settled the claims against Southmark for the full amount claimed, the settlement agreement provided that the Partnership receive a distribution of Southmark bankruptcy plan assets based on a claim amount of approximately $9,157,000. An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April 14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in May 1995, the Partnership received in full satisfaction of its claims, $984,649 in cash, and common and preferred stock in the reorganized Southmark which was subsequently sold for $317,675. These amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants. CURRENT OPERATIONS - ------------------ General: Under the original partnership agreement, the Partnership's primary business was to make short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring revenue-producing real properties. Due to borrower defaults and foreclosures on the properties securing all but one of these mortgages, the Partnership's business also includes ownership and operation of real estate. Since the beginning of operations and prior to the restructuring, the Partnership funded twelve mortgage loans, seven in 1987 and five in 1988, which completed the Partnership's investment of the proceeds from the sale of Units. The borrowers on the mortgage loan investments held by the Partnership were all affiliates of Southmark. During the early part of the terms of the loans, to the extent that property operations were insufficient to pay required interest, Southmark supported the borrowers with cash and the Partnership's loans were kept current. On July 14, 1989, Southmark filed for bankruptcy protection, and such support ceased and all loans went into default. In 1994, the remaining mortgage loan investment, which was secured by a mini-storage warehouse in Stone Mountain, Georgia that was sold to an unaffiliated borrower, was modified. Principal and interest payments under the modified terms were received by the Partnership. The loan was repaid in full in 1996. See Item 8 - Note 5 "Mortgage Loan Investment." In 1992, the Partnership received the proceeds from a $7,000,000 mortgage note payable secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds from the loan was used to make nonrecourse mortgage loans to affiliates of the General Partner in accordance with the Amended Partnership Agreement. The loans were secured by revenue-producing real estate and were either junior or senior to other indebtedness as more fully described in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliates." The mortgage note payable was repaid by the Partnership in 1995. A $5 million line of credit was obtained during 1995 for the purpose of funding additional loans to affiliates of the General Partner. The balance of the revolving credit agreement was repaid by the Partnership in 1998 and the agreement was cancelled by the Partnership in March 1999 as further discussed in Item 8 Note 7 - "Revolving Credit Agreement." The Partnership is engaged in the ownership, operation and management of commercial real estate and the servicing of mortgage loan investments secured by real estate. At December 31, 1998, the Partnership had one mortgage loan investment to an affiliate of the General Partner as described in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliates" and owned ten revenue-producing properties as described in Item 2 - Properties. The Partnership does not directly employ any personnel. The General Partner conducts the business of the Partnership directly and through its affiliates. The Partnership reimburses affiliates of the General Partner for such services rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note 2 "Transactions With Affiliates." The business of the Partnership to date has involved only one industry segment. See Item 8 - Financial Statements and Supplementary Data. The Partnership has no foreign operations. The Partnership's business is not seasonal. Business Plan: As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership placed AAA Century Airport Self-Storage and Burbank Mini-Storage on the market for sale effective August 1, 1997. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate and to service notes receivable secured by real estate, the Partnership is subject to all of the risks incidental to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership and the borrowers) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosures of the Partnership's properties, is described in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 2 - Properties for a discussion of the competitive conditions at each of the Partnership's properties. Forward-Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1998. All of these statements are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical and involve risks and uncertainties. The Partnership's actual occupancy trends, financial condition, results of operations, and cash flows for future periods may differ materially due to several factors. These factors include, but are not limited to, the Partnership's ability to control costs, make necessary capital improvements, negotiate sales or refinancings of its properties, collect payments on mortgage loan investments and respond to changing economic and competitive factors. Environmental Matters: Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described above, Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. Other Information: In August 1995, High River Limited Partnership, a Delaware limited partnership controlled by Carl C. Icahn ("High River") made unsolicited tender offers to purchase from holders of limited partnership units up to approximately 45% of the outstanding limited partnership units of certain other partnerships controlled by the General Partner. High River did not offer to purchase Units of the Partnership at that time. In September 1996, High River made an unsolicited tender offer to purchase any and all of the outstanding Units of the Partnership for a purchase price of $5.62 per unit. In addition, High River made unsolicited tender offers for certain other partnerships controlled by the General Partner. The Partnership recommended that the limited partners reject the tender offers made with respect to the Partnership and not tender their Units. The General Partner believes that as of February 1, 1999, High River has purchased 1.8% of the outstanding Units pursuant to the tender offers. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the tender offers has been dismissed without prejudice. On October 17, 1996, the Partnership announced that it had received an unsolicited offer from an unaffiliated third party to acquire all outstanding Units of the Partnership at $6.50 per Unit. After meeting with the offeror in Dallas and considering the $6.50 offer, the Partnership rejected it as being inadequate. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1998. All of the buildings and the land on which they are located are owned in fee. The two office buildings and Kendall Sunset Mini-Storage secured a $5 million line of credit. The balance of the line of credit was repaid during 1998 and the line of credit agreement was cancelled in March 1999 as described more fully in Item 8 - Note 7 "Revolving Credit Agreement." The remaining properties are unencumbered by mortgage indebtedness. See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization. In the opinion of management, the properties are adequately covered by insurance.
Net Basis 1998 Date Property Description of Property Debt Property Taxes Acquired - -------- ----------- ----------- ---- -------------- -------- Real Estate Investments: AAA Sentry Mini-Storage N. Lauderdale, FL 795 units $ 590,309 $ - $ 60,069 10/90 Forest Hill Mini-Storage W. Palm Beach, FL 683 units 1,847,895 - 41,559 8/90 Fountainbleau Mini-Storage Miami, FL 771 units 1,296,523 - 64,709 11/90 Kendall Sunset Mini-Storage Miami, FL 945 units 3,317,124 - 74,435 10/90 Margate Mini-Storage Margate, FL 640 units 1,135,156 - 52,533 10/90 Military Trail Mini-Storage W. Palm Beach, FL 685 units 1,796,286 - 42,767 8/90 One Corporate Center I Office Building Edina, MN 111,146 sq. ft. 4,179,729 - 358,309 12/89 One Corporate Center III Office Building Edina, MN 111,252 sq. ft. 4,079,032 - 346,832 12/89 -------------- ------------ ----------- $ 18,242,054 $ - $ 1,041,213 ============== ============ =========== Assets Held for Sale: AAA Century Airport Mini-Storage Inglewood, CA 567 units $ 1,913,276 $ - $ 33,776 9/90 Burbank Mini-Storage Burbank, CA 983 units 2,700,110 - 42,338 9/90 -------------- ------------ ----------- $ 4,613,386 $ - $ 76,114 ============== ============ ===========
- ----------------------------------------- Total: Office Buildings - 222,398 sq. ft. Mini-storage and self-storage warehouses - 6,069 units The following table sets forth the properties' occupancy rate and rent per square foot for the last five years:
1998 1997 1996 1995 1994 ------------- ------------- -------------- ------------- ------- Real Estate Investments: AAA Sentry Occupancy Rate............ 91% 94% 96% 96% 95% Rent Per Square Foot...... $ 8.60 $ 8.23 $ 8.01 $ 7.70 $ 7.00 Forest Hill Occupancy Rate............ 94% 100% 98% 97% 99% Rent Per Square Foot...... $10.70 $10.72 $10.41 $ 9.82 $ 9.22 Fountainbleau Occupancy Rate............ 93% 93% 96% 97% 99% Rent Per Square Foot...... $10.00 $ 9.27 $ 8.98 $ 8.38 $ 8.08 Kendall Sunset Occupancy Rate............ 92% 94% 92% 95% 96% Rent Per Square Foot...... $12.43 $12.06 $11.75 $11.72 $11.71 Margate Occupancy Rate............ 94% 88% 94% 90% 100% Rent Per Square Foot...... $10.51 $10.42 $ 9.95 $ 9.90 $10.06 Military Trail Occupancy Rate............ 85% 88% 88% 91% 90% Rent Per Square Foot...... $ 9.73 $ 9.82 $10.11 $ 9.35 $ 8.46 One Corporate Center I Occupancy Rate............ 99% 98% 100% 93% 95% Rent Per Square Foot...... $16.99 $13.07 $11.88 $10.92 $10.34 One Corporate Center III Occupancy Rate............ 88% 94% 95% 97% 96% Rent Per Square Foot...... $14.65 $13.72 $12.31 $11.17 $11.03 Assets Held for Sale: AAA Century Airport Occupancy Rate............ 98% 95% 96% 94% 95% Rent Per Square Foot...... $10.95 $10.31 $10.12 $10.19 $ 8.87 Burbank Occupancy Rate............ 99% 92% 87% 81% 81% Rent Per Square Foot...... $12.07 $11.25 $10.80 $10.29 $10.32
Occupancy rate represents all units leased divided by the total number of units for mini-storage properties and square footage leased divided by total square footage for other properties as of December 31 of the given year. Rent per square foot represents all revenue, except interest, net of bad debt expense, derived from the property's operations divided by the leasable square footage of the property. Competitive Conditions - ---------------------- Real Estate Investments: AAA Sentry - ---------- AAA Sentry Mini-Storage consists of five, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 795 units, with 85% of these units air conditioned. The property is located in North Lauderdale, Florida, in a predominately commercial area, with a mixture of single and multi-family residential properties. Occupancy decreased in 1998 as a result of new competition in the area that has created a surplus in storage units and limited demand. Specials are being offered by competitors to attract new renters and many long-term customers of AAA Sentry are now relocating to other new or renovated facilities. Two new competing facilities are scheduled to open in 1999. AAA Sentry's occupancy and rental rates are competitive with properties of the same age in the area. For 1999, management will continue to provide excellent customer service. Rental rates will be closely monitored and adjusted according to market conditions with concessions and discounts offered to attract new renters. The Partnership expects to maintain occupancy in the low 90% range in 1999. Forest Hill - ----------- Forest Hill Mini-Storage consists of nine, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 683 units, with 22 of these units being recreational vehicle parking spaces. 35% of the units are air conditioned. The property is located in a predominately residential neighborhood in West Palm Beach, Florida, consisting of single family homes and small businesses to the east and multi-family apartment communities to the south and west. Occupancy decreased in 1998 as a result of new competition in the area that has created a surplus in storage units. Two new competing facilities were built in 1998 and another new facility is scheduled to open in 1999. Currently, Forest Hill's rental rates are slightly higher than the competition. The Partnership expects to maintain occupancy in the mid 90% range in 1999 by offering rental concessions to tenants and continuing to emphasize customer service. Fountainbleau - ------------- Fountainbleau Mini-Storage consists of three, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 771 units. 56% of the units are air conditioned. The property is located in the central western quadrant of the Miami metroplex and is in close proximity to the Miami International Airport. The property has poor drive-by exposure with a limited view from the Florida Turnpike. The street located in front of the property is currently a dead end street but is scheduled to be opened to traffic by the middle of 1999. The immediate neighborhood is predominately industrial with single family residential and multi-family communities further to the south and north. The customer profile currently consists of local businesses. The area has been saturated by new mini-storage construction along with renovation of existing facilities. A competing facility located within three miles of Fountainbleau opened in 1998 and is still in the lease-up stage. Another competitor was recently sold and is offering discounts to new renters. In 1998, the street in front of the property was under construction and Fountainbleau maintained occupancy in the low 90% range by offering discounts and concessions to renters. The property is expected to benefit from direct drive-by exposure when the road construction is completed in 1999. The Partnership expects to maintain occupancy in the low 90% range in 1999 while offering minimal discounts and free rent. Kendall Sunset - -------------- Kendall Sunset Mini-Storage consists of ten, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 945 units. 35% of the units are air conditioned. The property is located in a residential neighborhood at the southwestern edge of the Miami metroplex. The area is tropical in nature and is in close proximity to the Everglades and Key West. The property's rental rates and occupancy are slightly higher than the competition in the immediate area. However, the property has been faced with new competitors added to the market in 1996. Rent concessions and discounts have been offered to maintain occupancy and compete within the market. Currently, there is little available land in the immediate area on which to build new storage facilities. The Partnership expects to offer fewer discounts to tenants in 1999 and to maintain occupancy in the low to mid 90% range. Margate - -------- Margate Mini-Storage consists of four, one-story and one, three-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 640 units, with 11 of the units being recreational vehicle parking spaces. 52% of the units are air conditioned. The property is located in Margate, Florida in a predominately commercial/retail neighborhood with single family homes and multi-family communities along the secondary streets. The property's rental rates are slightly higher than the competition, however, discounts and concessions have been given to attract new renters as a result of competition from new self-storage facilities over the past several years. The property has an excellent reputation in the marketplace and management expects to maintain occupancy in the mid 90% range in 1999. Military Trail - -------------- Military Trail Mini-Storage consists of eight, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 685 units, with 23 of the units being recreational vehicle parking spaces. 35% of the units are air conditioned. The property is located in a predominately commercial/retail neighborhood of West Palm Beach, Florida. The majority of the apartment complexes in the area are to the north with single family residences to the west. The location is the most positive feature with direct access to Military Trail, a major thoroughfare. Beginning in 1996, occupancy began to drop due to four new facilities being built in the area, and another older facility being renovated. An increased amount of discounts and concessions have been given to attract and retain renters. For 1999, the Partnership will continue to offer discounts and concessions and expects to increase occupancy to the high 80% range in 1999. One Corporate Center I and One Corporate Center III - --------------------------------------------------- One Corporate Center I and III are six-story office buildings located in the southwest suburban Minneapolis/St. Paul metropolitan area. The buildings are two of four identical buildings located in a commercial development identified as One Corporate Center. Rental rates increased over the past three years due to renewing leases at current market rates. Average occupancy rates in the area decreased slightly due to several new office buildings being built in 1997 and tenants moving to single-story or owner-occupied buildings. A generous parking ratio has helped the buildings compete with properties that have covered parking but lower parking ratios. A tenant that occupied approximately 12% of the available rental space of One Corporate Center I vacated upon the expiration of their lease in January 1999. The vacated space is expected to be released in 1999. Management will attempt to renew any other expiring leases at least six months prior to the expiration of the lease. This will allow management to market the space to a new tenant if the existing tenant declines to renew their lease. The properties will continue to perform capital improvements in 1999 in order to replace aging building systems and to upgrade common areas to remain competitive in the marketplace. The Partnership expects to maintain occupancy in the mid 90% range. Assets Held for Sale: AAA Century Airport - ------------------- AAA Century Airport Self-Storage consists of three, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 567 units, including 10 recreational vehicle parking spaces. Each unit is individually alarmed for additional security. The property does not offer climate-controlled units. The property is located approximately two miles from the Los Angeles International Airport in Inglewood, California. Inglewood is a relatively mature area with growth to the west generated by development around the airport. The property is located in a low income area with a high unemployment and crime rate. The competition is inferior in appearance and management. However, one competitor offers a truck and driver and another competitor offers crates and pick-up trucks for use by its renters. AAA Century has an advantage in that it is able to offer individually alarmed units for additional security. AAA Century's occupancy is currently above the average occupancy in the area of 91%, and the Partnership expects to maintain occupancy in the high 90% range in 1999. Burbank - ------- Burbank Mini-Storage consists of two, two-story and one, three-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 983 units, with 10 of these units being recreational vehicle parking spaces. All of the buildings have fire sprinklers, but do not offer climate-controlled environments. The property is located in the eastern quadrant of Burbank, California, just west of Interstate 5 and approximately twenty miles north of downtown Los Angeles and seven miles south of the Burbank Airport. The property suffers from lack of exposure and ease of access because it is located in an area that is not visible from the freeway or any major cross streets. Management increased occupancy in 1998 by discounting the upstairs units with poor accessibility that are seldom rented. One of the four competing self-storage properties in the area has superior visibility and highway access. Another competitor, recently opened for business, is currently installing security alarms on each unit. Management will continue to offer discounts for the upstairs units while rents will be increased on the lower level units which are in high demand. In 1999, management will install new signs to improve visibility to drive-by traffic. Burbank's occupancy is currently above the average occupancy in the area of 86%, and the Partnership expects to maintain occupancy in the high 90% range in 1999. The following schedule shows lease expirations for each of the Partnership's commercial properties for 1999 through 2008:
Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ----------- ----------- ------- ----------- One Corporate Center I 1999 4 17,672 $ 221,836 13% 2000 3 5,705 88,380 5% 2001 10 31,764 528,506 30% 2002 6 36,879 635,126 37% 2003 1 12,624 253,470 15% 2004-2008 - - - - One Corporate Center III 1999 5 18,365 $ 236,668 15% 2000 3 12,301 188,981 12% 2001 8 21,728 420,364 27% 2002 4 19,769 287,748 19% 2003 3 16,203 298,763 19% 2004 2 6,577 122,129 8% 2005-2008 - - - -
No mini-storage tenant leases 10% or more of the available rental space. The following schedule reflects information on commercial tenants occupying 10% or more of the leasable square feet for each property:
Nature of Business Square Footage Lease Use Leased Annual Rent Expiration - ---------- -------------- ------------- ---------- One Corporate Center I Bank 13,666 $ 160,576 1999 General Office 10,750 202,805 2002 General Office 19,626 314,016 2002 General Office 12,624 253,470 2003
One Corporate Center III None ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP - ------- -------------------------------------------------------- AND RELATED SECURITY HOLDER MATTERS ----------------------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders Limited partnership units 2,079 as of February 1, 1999 (C) Distributions paid to the limited partners totaled $5,522,998 in 1998 and $3,999,970 in 1997 from cash from operations. No distributions were paid to the General Partner in 1998 or 1997. During the last week of March 1999, the Partnership distributed approximately $1,508,000 to the limited partners of record as of March 1, 1999. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies - Distributions." ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
Statements of Years Ended December 31, Operations 1998 1997 1996 1995 1994 - ------------------ ----------- ----------- ----------- ----------- ----------- Rental revenue .................. $ 9,135,799 $ 8,366,664 $ 7,943,383 $ 7,517,404 $ 7,234,070 Interest income on mort- gage loan investments ........ 414,070 766,211 268,665 440,658 451,841 Income before extra- ordinary item ................ 2,815,090 2,788,653 2,245,414 3,268,110 1,355,563 Extraordinary item .............. -- -- -- (252,402) -- Net income ...................... 2,815,090 2,788,653 2,245,414 3,015,708 1,355,563 Net income per weighted average hundred limited partnership units: Income before extra- ordinary item .............. $ 53.60 $ 52.72 $ 42.15 $ 60.93 $ 25.09 Extraordinary item ........... -- -- -- (4.71) -- ----------- ----------- ----------- ----------- ----------- Net income ................... $ 53.60 $ 52.72 $ 42.15 $ 56.22 $ 25.09 =========== =========== =========== =========== =========== Distributions per weighted average hundred limited partnership units ............ $ 106.21 $ 76.38 $ 113.77 $ -$ - =========== =========== =========== =========== ===========
As of December 31, Balance Sheets 1998 1997 1996 1995 1994 - -------------- ------------- ----------- ------------ ------------ ------------- Real estate investments, net... $ 18,242,054 $18,630,576 $ 23,888,948 $ 24,977,575 $ 25,921,989 Assets held for sale........... 4,613,386 4,549,881 - - - Mortgage loan investments, net......................... 1,306,488 6,956,487 4,692,760 3,597,673 4,679,929 Total assets................... 27,841,371 33,681,114 32,641,270 35,489,741 39,501,853 Long-term debt................. - 3,437,648 1,101,619 - 6,726,266 Partners' equity............... 25,958,341 28,999,177 30,543,422 34,630,930 31,948,150
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- FINANCIAL CONDITION - ------------------- Under the original partnership agreement, the Partnership was formed to engage in the business of making short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring revenue-producing real properties and reinvesting the proceeds from repayment of such loans in additional affiliate loans. In 1989, the Partnership initiated foreclosure proceedings on the collateral securing each of its mortgage loan investments. The Partnership acquired two office buildings in 1989 and eight mini-storage warehouses in 1990 as a result of the foreclosures. Also in 1990, one loan was collected in full when the borrower sold the mini-storage warehouse securing the loan. The remaining mortgage loan investment, secured by a mini-storage warehouse owned by an unaffiliated limited partnership, was collected in full in 1996. In October 1992, the Partnership received approximately $6.5 million of net proceeds from a $7 million loan secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds were used for working capital and for general partnership purposes. The loan proceeds were also used to make such loans to affiliates in accordance with the Amended Partnership Agreement as more fully described in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliates" and Item 13 - Certain Relationships and Related Transactions. The mortgage note payable was paid in full in 1995. A $5 million line of credit was obtained during 1995 for the purposing of funding additional loans to affiliates of the General Partner. The balance of the revolving credit agreement was repaid by the Partnership in 1998 and the agreement was cancelled by the Partnership in 1999 as more fully discussed in Item 8 - Note 7 - "Revolving Credit Agreement." RESULTS OF OPERATIONS - --------------------- 1998 compared to 1997 Revenue: Total revenue increased by $453,965 in 1998 as compared to 1997. The increase was mainly due to an increase in rental revenue and other interest income, partially offset by a decrease in interest income on mortgage loan investments - affiliates, as discussed below. Rental revenue increased by $769,135 in 1998 as compared to 1997, mainly due to increases of approximately $436,000 and $103,000 at One Corporate Center I and III office buildings, respectively, as a result of increases in rental rates. Rental rate increases also resulted in increased rental revenue at all of the mini-storage properties in 1998 except for Forest Hill and Military Trail. Rental revenue at these two properties decreased slightly due to an increase in discounts and concessions given to tenants at Forest Hill and a decrease in occupancy at Military Trail. See Item 2 - Properties for a more detailed analysis of occupancy and rents per square foot. Interest income on mortgage loan investments - affiliates in 1998 decreased by $352,141 in relation to 1997. The decrease was mainly due to the collection of approximately $5.7 million of affiliate loans in the second quarter of 1998. Other interest income increased by $36,971 in 1998 as compared to 1997. The increase is mainly due to an increase in cash available for short-term investment in 1998. The Partnership held approximately $2.8 million of cash and cash equivalents at December 31, 1998 as compared to approximately $2.4 million at December 31, 1997. The majority of the increase occurred at the end of the second quarter of 1998 when the Partnership collected approximately $5.7 million of affiliate loans. Approximately $3.4 million of this amount was used to pay off the revolving credit agreement in June 1998. The Partnership distributed approximately $5.5 million to the limited partners in 1998, approximately $3.3 million of which was distributed at the end of September 1998. Expenses: Total expenses increased by $427,528 in 1998 as compared to 1997. The increase was mainly due to increased property taxes, personnel costs, property management fees - affiliates and general and administrative expenses, partially offset by a decrease in interest and other property operating expenses, as discussed below. Interest expense decreased in 1998 by $102,423 in relation to 1997, due to the payoff of the Partnership's line of credit in June 1998. In 1998, property taxes increased by $139,244 in relation to the prior year. The increase was mainly due to an increase in the assessed taxable value of One Corporate Center I and III office buildings by taxing authorities. Personnel costs increased by $97,768 in 1998 as compared to 1997. The increase was mainly due to the hiring of maintenance personal at AAA Century Airport and Margate mini-storages. Property management fees - affiliates increased by $46,437 in 1998 as compared to 1997. The increase was mainly due to an increase in gross rental receipts at One Corporate Center I and III office buildings, on which the fees are based. Other property operating expenses decreased by $59,907 in 1998 in relation to 1997. The decrease was primarily due to a decline in amortization of prepaid leasing commissions at the two office buildings due to the expiration of several leases in 1998. In addition, there was a decrease in earthquake insurance costs at AAA Century Airport and Burbank mini-storages in 1998. General and administrative expenses increased by $404,840 in 1998 as compared to 1997. The increase was mainly due to costs incurred to explore alternatives to maximize the value of the Partnership (see Liquidity and Capital Resources). 1997 compared to 1996 Revenue: Total revenue increased by $718,361 in 1997 as compared to 1996. The increase was mainly due to an increase in rental revenue and interest income on mortgage loan investments - affiliates, partially offset by decreases in interest income on the Partnership's mortgage loan investment to an unaffiliated borrower, other interest income and a gain on extinguishment of mortgage loan investment, as discussed below. Rental revenue increased by $423,281 in 1997 as compared to 1996. The increase was mainly due to increases of approximately $133,000 and $157,000 at One Corporate Center I and III office buildings, respectively, as a result of increases in rental rates in 1997 as well as decreased discounts and concessions given to tenants. Also, there was an increase in expense reimbursements billed to tenants as a result of an increase in property taxes incurred by the two office buildings in 1997, as discussed below. In addition, rental revenue increased at all of the mini-storage properties, except for Military Trail, as a result of an increase in rental rates in 1997. Rental revenue at Military Trail decreased slightly due to a small decline in average occupancy rates in 1997. See Item 2 - Properties for a more detailed analysis of occupancy and rents per square foot. In 1996, the Partnership recorded $32,444 of interest income on the mortgage loan investment related to the A-Quality Mini-Storage loan. Since this loan was repaid by the borrower in the first quarter of 1996, no such income was recorded in 1997. Interest income on mortgage loan investments - affiliates increased by $529,990 in 1997 as compared to 1996. The increase was mainly due to a higher average amount of loans outstanding during 1997. The Partnership had loaned approximately $7 million to affiliates as of December 31, 1997 and approximately $4.7 million as of December 31, 1996. Other interest income in 1997 decreased by $149,625 in relation to 1996, primarily due to a lower amount of cash available for short-term investment in 1997. The Partnership held approximately $5.7 million of cash and cash equivalents at the beginning of 1996. Cash and cash equivalents decreased to approximately $3 million at the end of 1996 and further decreased to approximately $2.4 million at the end of 1997. In 1996, the Partnership recognized a $52,841 gain on extinguishment of mortgage loan investment due to the early payoff of the A-Quality note. No such gain was recognized in 1997. Expenses: Total expenses increased by $175,122 in 1997 as compared to 1996. The increase was mainly due to an increase in interest expense and property taxes, partially offset by a decrease in depreciation and amortization and general and administrative expenses, as discussed below. Interest expense in 1997 increased by $146,982 as compared to 1996, due to a greater amount borrowed under the Partnership's line of credit agreement in 1997. The interest expense recorded in 1997 and 1996 represents interest costs and amortization of deferred borrowing costs relating to the Partnership's $5 million line of credit. The Partnership did not borrow any funds under the line of credit agreement until November 1996. The Partnership had borrowed approximately $3.4 million under the agreement at December 31, 1997 as compared to approximately $1.1 million at December 31, 1996. Depreciation and amortization expense decreased by $195,828 in 1997 as compared to 1996. The decrease was due to AAA Century Airport and Burbank mini-storages being classified as assets held for sale by the Partnership effective August 1, 1997. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Partnership ceased recording depreciation on the assets at the time they were placed on the market for sale. Property taxes in 1997 increased by $174,483 in relation to 1996, due to an increase in the assessed taxable value of One Corporate Center I and III office buildings by taxing authorities. General and administrative expenses decreased by $33,750 in 1997 as compared to 1996, mainly due to a decrease in costs relating to evaluation and dissemination of information regarding an unsolicited tender offer as discussed in Item 1 - Business. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership generated $5,078,996 of cash through operating activities in 1998, $4,409,938 in 1997 and $4,134,772 in 1996. The increase in 1998 as compared to 1997 was mainly due to an increase in cash received from tenants and a decrease in cash paid to affiliates. The increases were partially offset by a decrease in interest received from affiliates and an increase in cash paid to suppliers and property taxes paid. The increase in 1997 as compared to 1996 was mainly due to an increase in cash received from tenants and interest received from affiliates. These increases were partially offset by a decrease in interest received from non-affiliates, and an increase in interest paid and property taxes paid (see discussion of changes in corresponding revenue and expense accounts, above). The Partnership expended $1,025,133, $724,380 and $540,072 for additions to its real estate investments and assets held for sale in 1998, 1997 and 1996, respectively. The increase in 1998 as compared to 1997 and 1996 was mainly due to roofs being replaced at AAA Sentry and Fountainbleau mini storages. A greater amount of tenant improvements were completed at the two office buildings in 1998 and 1997 as compared to 1996. In addition, a lighting upgrade was completed at One Corporate Center I in 1997. In 1996, the Partnership received cash of $1,404,026 as repayment in full of the Partnership's mortgage loan investment to an unaffiliated borrower. The Partnership collected (net of new loans made) $5,649,999 from affiliates in 1998 for repayments of mortgage loan investments - affiliates. The Partnership made loans to affiliates (net of collections) of $2,263,727 and $2,456,858 in 1997 and 1996, respectively. In 1997 and 1996, the Partnership received $2,336,029 and $1,101,619, respectively, from its revolving credit agreement. In 1998, the Partnership repaid the $3,437,648 balance of this revolving credit agreement. The Partnership distributed $5,522,998, $3,999,970, and $5,999,994 to the limited partners in 1998, 1997, and 1996, respectively, from cash from operations. Short-term liquidity: At December 31, 1998, the Partnership held cash and cash equivalents of $2,844,032. This balance provides a reasonable level of working capital for the Partnership's immediate needs in operating its properties. For the Partnership as a whole, management projects positive cash flow from operations in 1999. The Partnership has budgeted approximately $1,047,000 for necessary capital improvements for all properties in 1999, which are expected to be funded from available cash reserves or from operations of the properties. Additional efforts to maintain and improve Partnership liquidity have included continued attention to property management activities. The objective has been to obtain maximum occupancy rates while holding expenses to levels necessary to maximize cash flows. The Partnership has made capital expenditures on its properties where improvements were expected to increase the competitiveness and marketability of the properties. During the last week of March 1999, the Partnership distributed approximately $1,508,000 to the limited partners of record as of March 1, 1999. Long-term liquidity: While the outlook for maintenance of adequate levels of liquidity is favorable, should operations deteriorate and present cash resources be insufficient for current needs, the Partnership would require other sources of working capital. Possible actions to resolve cash deficiencies include refinancings, deferral of capital expenditures on Partnership properties except where improvements are expected to increase the competitiveness and marketability of the properties, arranging financing from affiliates or the ultimate sale of the properties. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership placed AAA Century Airport Self-Storage and Burbank Mini-Storage on the market for sale effective August 1, 1997. YEAR 2000 DISCLOSURE - -------------------- State of readiness - ------------------ The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major systems failure or miscalculations. Management has assessed its information technology ("IT") infrastructure to identify any systems that could be affected by the year 2000 problem. The IT used by the Partnership for financial reporting and significant accounting functions was made year 2000 compliant during recent systems conversions. The software utilized for these functions are licensed by third party vendors who have warranted that their systems are year 2000 compliant. Management is in the process of evaluating the mechanical and embedded technological systems at the various properties. Management has inventoried all such systems and queried suppliers, vendors and manufacturers to determine year 2000 compliance. Management will complete assessment of findings by May 1, 1999. In circumstances of non-compliance management will work with the vendor to remedy the problem or seek alternative suppliers who will be in compliance. Management believes that the remediation of any outstanding year 2000 conversion issues will not have a material or adverse effect on the Partnership's operations. However, no estimates can be made as to the potential adverse impact resulting from the failure of third party service providers and vendors to be year 2000 compliant. Cost - ---- The cost of IT and embedded technology systems testing and upgrades is not expected to be material to the Partnership. Because all the IT systems have been upgraded over the last three years, all such systems were compliant, or made compliant at no additional cost by third party vendors. Management anticipates the costs of assessing, testing, and if necessary replacing embedded technology components will be less than $50,000. Such costs will be funded from operations of the Partnership. Risks - ----- Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures the Partnership undertakes, but also on the way in which the year 2000 issue is addressed by government agencies and entities that provide services or supplies to the Partnership. Management has not determined the most likely worst case scenario to the Partnership. As management studies the findings of its property systems assessment and testing, management will develop a better understanding of what would be the worst case scenario. Management believes that progress on all areas is proceeding and that the Partnership will experience no adverse effect as a result of the year 2000 issue. However, there is no assurance that this will be the case. Contingency plans - ----------------- Management is developing contingency plans to address potential year 2000 non-compliance of IT and embedded technology systems. Management believes that failure of any IT system could have an adverse impact on operations. However, management believes that alternative systems are available that could be utilized to minimize such impact. Management believes that any failure in the embedded technology systems could have an adverse impact on that property's performance. Management will assess these risks and develop plans to mitigate possible failures by June, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ----------------------------------------------------------- Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Page Number ------ INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 21 Balance Sheets at December 31, 1998 and 1997................................... 22 Statements of Operations for each of the three years in the period ended December 31, 1998..................................................... 23 Statements of Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1998....................................... 24 Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................................................... 25 Notes to Financial Statements.................................................. 27 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization............................................ 37
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund XXVII, L.P.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XXVII, L.P. (a Delaware limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XXVII, L.P. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen, LLP Dallas, Texas March 19, 1999 MCNEIL REAL ESTATE FUND XXVII, L.P. BALANCE SHEETS
December 31, --------------------------------- 1998 1997 ------------ ------------ ASSETS - ------ Real estate investments: Land ....................................................... $ 4,196,277 $ 4,196,277 Buildings and improvements ................................. 24,202,659 23,241,031 ------------ ------------ 28,398,936 27,437,308 Less: Accumulated depreciation and amortization ........... (10,156,882) (8,806,732) ------------ ------------ 18,242,054 18,630,576 Assets held for sale .......................................... 4,613,386 4,549,881 Mortgage loan investments - affiliates ........................ 1,306,488 6,956,487 Cash and cash equivalents ..................................... 2,844,032 2,440,084 Cash segregated for security deposits and repurchase of limited partnership units .................... 467,207 442,193 Accounts receivable ........................................... 178,537 426,825 Accrued interest receivable ................................... 12,206 64,991 Prepaid expenses and other assets ............................. 177,461 170,077 ------------ ------------ $ 27,841,371 $ 33,681,114 ============ ============ LIABILITIES AND PARTNERS' EQUITY (DEFICIT) - ------------------------------------------ Revolving credit agreement .................................... $ -- $ 3,437,648 Accounts payable and accrued expenses ......................... 70,657 107,549 Payable to limited partners ................................... 332,928 332,928 Payable to affiliates ......................................... 1,230,795 542,045 Security deposits and deferred rental revenue ................. 248,650 261,767 ------------ ------------ 1,883,030 4,681,937 ------------ ------------ Partners' equity (deficit): Limited partners - 10,000,000 limited partnership units authorized; 5,162,909 and 5,199,901 limited partnership units outstanding at December 31, 1998 and 1997, respectively ................................... 26,007,139 29,076,126 General Partner ............................................ (48,798) (76,949) ------------ ------------ 25,958,341 28,999,177 ------------ ------------ $ 27,841,371 $ 33,681,114 ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Revenue: Rental revenue ......................... $9,135,799 $8,366,664 $7,943,383 Interest income on mortgage loan investment ........................... -- -- 32,444 Interest income on mortgage loan investments - affiliates ............. 414,070 766,211 236,221 Other interest income .................. 187,328 150,357 299,982 Gain on extinguishment of mortgage loan investment ...................... -- -- 52,841 ---------- ---------- ---------- Total revenue ........................ 9,737,197 9,283,232 8,564,871 ---------- ---------- ---------- Expenses: Interest ............................... 166,866 269,289 122,307 Depreciation and amortization .......... 1,350,150 1,432,871 1,628,699 Property taxes ......................... 1,117,327 978,083 803,600 Personnel costs ........................ 817,209 719,441 667,758 Repairs and maintenance ................ 584,959 594,984 590,986 Property management fees - affiliates ........................... 508,726 462,289 435,159 Utilities .............................. 430,832 459,243 455,718 Other property operating expenses ...... 530,980 590,887 581,026 General and administrative ............. 512,400 107,560 141,310 General and administrative - affiliates ........................... 902,658 879,932 892,894 ---------- ---------- ---------- Total expenses ....................... 6,922,107 6,494,579 6,319,457 ---------- ---------- ---------- Net income ................................ $2,815,090 $2,788,653 $2,245,414 ========== ========== ========== Net income allocable to limited partners ............................... $2,786,939 $2,760,766 $2,222,960 Net income allocable to General Partner ................................ 28,151 27,887 22,454 ---------- ---------- ---------- Net income ................................ $2,815,090 $2,788,653 $2,245,414 ========== ========== ========== Net income per weighted average hundred limited partnership units ...... $ 53.60 $ 52.72 $ 42.15 ========== ========== ========== Distributions per weighted average hundred limited partnership units ...... $ 106.21 $ 76.38 $ 113.77 ========== ========== ==========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1998, 1997 and 1996
Total General Limited Partners' Partner Partners Equity ------------- ------------- ------------- Balance at December 31, 1995 .......... $ (127,290) $ 34,758,220 $ 34,630,930 Repurchase of 36,992 limited partnership units .................. -- (332,928) (332,928) Net income ............................ 22,454 2,222,960 2,245,414 Distributions to limited partners -- (5,999,994) (5,999,994) ------------ ------------ ------------ Balance at December 31, 1996 .......... (104,836) 30,648,258 30,543,422 Repurchase of 36,992 limited partnership units .................. -- (332,928) (332,928) Net income ............................ 27,887 2,760,766 2,788,653 Distributions to limited partners ..... -- (3,999,970) (3,999,970) ------------ ------------ ------------ Balance at December 31, 1997 .......... (76,949) 29,076,126 28,999,177 Repurchase of 36,992 limited partnership units .................. -- (332,928) (332,928) Net income ............................ 28,151 2,786,939 2,815,090 Distributions to limited partners ..... -- (5,522,998) (5,522,998) ------------ ------------ ------------ Balance at December 31, 1998 .......... $ (48,798) $ 26,007,139 $ 25,958,341 ============ ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Cash received from tenants ............... $ 9,304,733 $ 8,203,733 $ 7,881,796 Cash paid to suppliers ................... (2,873,093) (2,308,949) (2,278,401) Cash paid to affiliates .................. (722,634) (1,171,013) (1,210,260) Interest received ........................ 187,328 150,357 344,947 Interest received from affiliates ........ 466,855 744,420 215,064 Interest paid ............................ (166,866) (230,527) (14,774) Property taxes paid ...................... (1,117,327) (978,083) (803,600) ----------- ----------- ----------- Net cash provided by operating activities ............................... 5,078,996 4,409,938 4,134,772 ----------- ----------- ----------- Cash flows from investing activities: Additions to real estate investments and assets held for sale ............... (1,025,133) (724,380) (540,072) Proceeds from collection of mortgage loan investments ....................... -- -- 1,404,026 Mortgage loan investments - affiliates ............................. (75,000) (2,336,029) (3,409,396) Proceeds from collection of mortgage loan investments - affiliates .......... 5,724,999 72,302 952,538 ----------- ----------- ----------- Net cash provided by (used in) investing activities ..................... 4,624,866 (2,988,107) (1,592,904) ----------- ----------- ----------- Cash flows from financing activities: Net increase in cash segregated for repurchase of limited partnership units ...................... (6,340) (7,729) (6,371) Proceeds from revolving credit agreement .............................. -- 2,336,029 1,101,619 Repayment of revolving credit Agreement .............................. (3,437,648) -- -- Repurchase of limited partnership units .................................. (332,928) (332,928) (332,928) Distributions to limited partners ........ (5,522,998) (3,999,970) (5,999,994) ----------- ----------- ----------- Net cash used in financing activities ....... (9,299,914) (2,004,598) (5,237,674) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ......................... 403,948 (582,767) (2,695,806) Cash and cash equivalents at beginning of year ........................ 2,440,084 3,022,851 5,718,657 ----------- ----------- ----------- Cash and cash equivalents at end of year .................................. $ 2,844,032 $ 2,440,084 $ 3,022,851 =========== =========== ===========
See discussion of non-cash investing activities in Note 6 - "Mortgage Loan Investments - Affiliates." See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF CASH FLOWS Reconciliation of Net Income to Net Cash Provided by Operating Activities
For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income .................................. $ 2,815,090 $ 2,788,653 $ 2,245,414 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............ 1,350,150 1,432,871 1,628,699 Amortization of deferred borrowing costs .................................. -- 48,765 97,530 Gain on extinguishment of mortgage loan investment ........................ -- -- (52,841) Changes in assets and liabilities: Cash segregated for security deposits ............................. (18,674) (7,341) (13,187) Accounts receivable .................... 248,288 (128,883) 1,893 Accrued interest receivable ............ 52,785 (21,791) (8,636) Prepaid expenses and other assets ............................... (7,384) 49,604 98,482 Accounts payable and accrued expenses ............................. (36,892) 29,914 9,164 Payable to affiliates .................. 688,750 171,208 117,793 Security deposits and deferred rental revenue ....................... (13,117) 46,938 10,461 ----------- ----------- ----------- Total adjustments .................. 2,263,906 1,621,285 1,889,358 ----------- ----------- ----------- Net cash provided by operating activities ............................... $ 5,078,996 $ 4,409,938 $ 4,134,772 =========== =========== ===========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------ McNeil Real Estate Fund XXVII, L.P. (the "Partnership"), formerly known as Southmark Prime Plus, L.P., was organized by affiliates of Southmark Corporation ("Southmark") on January 16, 1987, as a limited partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act to make short-term loans to affiliates of the general partner. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Prime Plus Corp. (the "Original General Partner"), a wholly-owned subsidiary of McNeil. The Original General Partner was purchased from Southmark by McNeil on March 13, 1991. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, Dallas, Texas 75240. The sole limited partner of the Partnership was initially Southmark Depositary Corp. (the "Depositary"), a wholly-owned subsidiary of Southmark. The Depositary assigned the principal attributes of its aggregate limited partner interest in the Partnership to the Depositary unit holders. The Depositary units were subsequently converted to limited partnership units ("Units"). Under the original partnership agreement, the Partnership's primary business was to make short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring revenue-producing real properties. Due to borrower defaults and foreclosures on the properties securing all but one of these mortgages, the Partnership's business also includes ownership and operation of real estate. In 1992, the Partnership used a portion of proceeds from a mortgage note payable to make nonrecourse mortgage loans to affiliates of the General Partner in accordance with the Amended Partnership Agreement. The mortgage note payable was repaid by the Partnership in 1995, and a $5 million revolving credit agreement was obtained that was used to fund additional loans made to affiliates of the General Partner. The balance of the revolving credit agreement was repaid by the Partnership in 1998 as further discussed in Note 7 - "Revolving Credit Agreement." The loans made to affiliates are secured by revenue-producing real estate and are either junior or senior to other indebtedness as more fully described in Note 6 - "Mortgage Loan Investments - Affiliates." The Partnership is engaged in the ownership, operation and management of commercial real estate and the servicing of mortgage loan investments secured by real estate. At December 31, 1998, the Partnership had one mortgage loan investment to an affiliate of the General Partner as described in Note 6 - "Mortgage Loan Investments Affiliates" and owned ten revenue-producing properties as described in Note 4 - "Real Estate Investments." As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership placed AAA Century Airport Self-Storage and Burbank Mini-Storage on the market for sale effective August 1, 1997. Basis of Presentation - --------------------- The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Adoption of Recent Accounting Pronouncements - -------------------------------------------- The Partnership has adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires an enterprise to report financial information about its reportable operating segments, which are defined as components of a business for which separate financial information is evaluated regularly by the chief decision maker in allocating resources and assessing performance. The Partnership does not prepare such information for internal use, since it analyzes the performance of and allocates resources for each property individually. The Partnership's management has determined that it operates one line of business and it would be impracticable to report segment information. Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial statements. Real Estate Investments - ----------------------- Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. Assets Held for Sale - -------------------- Assets held for sale are stated at the lower of depreciated cost or fair value less costs to sell. Depreciation and amortization on these assets cease at the time they are placed on the market for sale. Depreciation and Amortization - ----------------------------- Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant improvements are capitalized and are amortized over the terms of the related tenant lease, using the straight-line method. Mortgage Loan Investments - ------------------------- Mortgage loan investments are recorded at their original basis, net of any allowance for impairment. Interest income is recognized as it is earned. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on hand and cash on deposit in financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value. Rental Revenue - -------------- The Partnership leases its mini-storage warehouses under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned. The Partnership leases its commercial properties under non-cancelable operating leases. Certain leases provide concessions and/or periods of escalating or free rent. Rental revenue is recognized on a straight-line basis over the term of the related leases. The excess of the rental revenue recognized over the contractual rental payments is recorded as accrued rent receivable and is included in accounts receivable on the Balance Sheets. Income Taxes - ------------ No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax and the tax effect of its activities accrues to the partners. Allocation of Net Income and Net Loss - ------------------------------------- The Amended Partnership Agreement provides for net income and net loss of the Partnership to be allocated 99% to the limited partners and 1% to the General Partner. Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocation of Partnership deductions attributable to debt. The Partnership's tax allocations for 1998, 1997, and 1996 have been made in accordance with these provisions. Distributions - ------------- At the discretion of the General Partner, distributions to the partners are paid from cash from operations available after payment of affiliate compensation. Under the terms of the Amended Partnership Agreement, the General Partner is not entitled to distributions from operations. Cash from operations available for distribution is determined by provisions of the Amended Partnership Agreement, and differs from the amount reported as net cash provided by operating activities in the accompanying Statements of Cash Flows. Cash from operations available for distribution consists of cash received from operations of the Partnership during a given period of time less (1) operational cash disbursements during the same period of time including capital improvements, unscheduled mortgage principal reductions and repayment of Partnership advances from affiliates, (2) a reasonable allowance for reserves, contingencies and anticipated obligations as determined at the discretion of the General Partner, (3) proceeds held pending investment in affiliate loans, and (4) any monies reserved for repurchase of Units. Liquidation proceeds will be distributed when the Partnership is dissolved after taking into account all items of income, gain, loss or deduction. Distribution of liquidation proceeds will then be made to the partners with positive capital account balances. The Partnership distributed $5,522,998, $3,999,970, and $5,999,994 of cash from operations in 1998, 1997, and 1996, respectively. No distributions were paid to the General Partner in 1998, 1997 or 1996. During the last week of March 1999, the Partnership distributed approximately $1,508,000 to the limited partners of record as of March 1, 1999. Net Income Per Hundred Limited Partnership Units - ------------------------------------------------ Net income per one hundred Units is computed by dividing net income allocated to the limited partners by the weighted average number of Units outstanding expressed in hundreds. Per unit information has been computed based on 51,999, 52,369 and 52,739 (in hundreds) Units outstanding in 1998, 1997 and 1996, respectively. NOTE 2 - TRANSACTIONS WITH AFFILIATES - ------------------------------------- The Partnership pays property management fees equal to 5% of the gross rental receipts for its mini-storage warehouses and 6% of gross rental receipts for its commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management services for the Partnership's mini-storage warehouses and commercial properties and leasing services for its mini-storage warehouses. McREMI may also choose to provide leasing services for the Partnership's commercial properties, in which case McREMI will receive property management fees from such commercial properties equal to 3% of the property's gross rental receipts plus leasing commissions based on the prevailing market rate for such services where the property is located. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee to the General Partner. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $30 per gross square foot for mini-storage warehouses and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows:
For the Years Ended December 31, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Property management fees ............. $ 508,726 $ 462,289 $ 435,159 Charged to general and administrative - affiliates: Partnership administration ........ 287,865 270,653 314,832 Asset management fee .............. 614,793 609,279 578,062 ---------- ---------- ---------- $1,411,384 $1,342,221 $1,328,053 ========== ========== ==========
Until March 13, 1991, the Original General Partner was entitled to receive, out of cash from operations, a performance incentive fee equal to 20% of all points received by the Partnership on mortgage loans if the limited partners received distributions of cash from operations equal to a 10% cumulative noncompounding annual return on their original capital investment. Such fees were cumulative, were accrued in the years earned and are to be paid when conditions are met. Conditions for payment have not yet been met and, at December 31, 1998 and 1997, $141,647 of amounts accrued in prior years are included in payable to affiliates on the Balance Sheets. Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make loans to affiliates of the General Partner, so long as such loans meet certain conditions. See Note 6 - "Mortgage Loan Investments - Affiliates" for a discussion of these transactions. Payable to affiliates at December 31, 1998 and 1997 consisted primarily of the performance incentive fee of $141,647 accrued in prior years, property management fees, Partnership general and administrative expenses, asset management fees and prepaid interest as further discussed in Note 6 - "Mortgage Loan Investments - Affiliates." Except for the performance incentive fee and prepaid interest, all accrued fees are due and payable from current operations. NOTE 3 - TAXABLE INCOME - ----------------------- McNeil Real Estate Fund XXVII, L.P. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly. The Partnership's net assets and liabilities for tax purposes exceeded the net assets and liabilities for financial reporting purposes by $13,867,070 in 1998, $12,759,576 in 1997 and $12,040,518 in 1996. NOTE 4 - REAL ESTATE INVESTMENTS - -------------------------------- The basis and accumulated depreciation and amortization of the Partnership's real estate investments at December 31, 1998 and 1997 are set forth in the following tables:
Accumulated Buildings and Depreciation Net Book 1998 Land Improvements and Amortization Value ---- -------------- -------------- --------------- -------------- AAA Sentry N. Lauderdale, FL $ 70,337 $ 799,102 $ (279,130) $ 590,309 Forest Hill W. Palm Beach, FL 510,780 2,028,226 (691,111) 1,847,895 Fountainbleau Miami, FL 287,114 1,437,444 (428,035) 1,296,523 Kendall Sunset Miami, FL 672,756 3,957,464 (1,313,096) 3,317,124 Margate Margate, FL 233,575 1,387,811 (486,230) 1,135,156 Military Trail W. Palm Beach, FL 571,715 1,874,290 (649,719) 1,796,286 One Corporate Center I Edina, MN 925,000 6,175,817 (2,921,088) 4,179,729 One Corporate Center III Edina, MN 925,000 6,542,505 (3,388,473) 4,079,032 ------------- ------------- ------------- ------------- $ 4,196,277 $ 24,202,659 $ (10,156,882) $ 18,242,054 ============= ============= ============= ============== Accumulated Buildings and Depreciation Net Book 1997 Land Improvements and Amortization Value ---- -------------- -------------- ---------------- -------------- AAA Sentry $ 70,337 $ 612,992 $ (211,565) $ 471,764 Forest Hill 510,780 1,995,632 (598,301) 1,908,111 Fountainbleau 287,114 1,237,674 (351,439) 1,173,349 Kendall Sunset 672,756 3,915,577 (1,144,141) 3,444,192 Margate 233,575 1,354,964 (411,706) 1,176,833 Military Trail 571,715 1,869,813 (560,022) 1,881,506 One Corporate Center I 925,000 5,975,937 (2,563,037) 4,337,900 One Corporate Center III 925,000 6,278,442 (2,966,521) 4,236,921 ------------- ------------- ------------- ------------- $ 4,196,277 $ 23,241,031 $ (8,806,732) $ 18,630,576 ============= ============= ============= =============
On August 1, 1997, the General Partner placed AAA Century Airport Self-Storage, located in Inglewood, California, on the market for sale. Accordingly, the property was classified as such at December 31, 1998 and 1997 with a net book value of $1,913,276 and $1,908,947, respectively. On August 1, 1997, the General Partner placed Burbank Mini-Storage, located in Burbank, California, on the market for sale. Accordingly, the property was classified as such at December 31, 1998 and 1997 with a net book value of $2,700,110 and $2,640,934, respectively. The results of operations for the assets held for sale were $1,050,539, $836,166 and $724,265 for the years ended December 31, 1998, 1997 and 1996, respectively. Results of operations are operating revenues less operating expenses including depreciation and interest expense. The Partnership leases its office buildings under non-cancelable operating leases. Future minimum rents to be received as of December 31, 1998 are as follows: 1999.................................... $ 3,055,918 2000.................................... 2,896,147 2001.................................... 2,262,079 2002.................................... 1,483,799 2003.................................... 490,709 Thereafter.............................. 73,549 ---------- Total $10,262,201 ========== Future minimum rents do not include expense reimbursements for common area maintenance, property taxes and other expenses. These expense reimbursements amounted to $267,686, $265,764 and $132,563 for the years ended December 31, 1998, 1997 and 1996, respectively, and are included in rental revenue on the Statements of Operations. NOTE 5 - MORTGAGE LOAN INVESTMENT - --------------------------------- In 1987, the Partnership made a nonrecourse mortgage loan to an affiliate of Southmark secured by A-Quality Mini-Storage. The property was subsequently sold to an unaffiliated borrower subject to the Partnership's first priority mortgage loan. In April 1994, the borrower, who had filed for bankruptcy in 1990, and the Partnership reached a settlement concerning the loan. Under the settlement, the borrower paid the Partnership $150,000 in cash and the loan was renewed for $1,453,194 (representing the original $2,100,000 principal balance less all post bankruptcy petition payments made by the borrower) effective January 1, 1994. An additional second lien loan was executed in the amount of $134,397 at an interest rate of 6%, which was paid in full in the third quarter of 1995. Principal and interest at a rate of prime plus 2% were payable monthly on the first lien loan. On March 21, 1996, the Partnership received $1,404,026 as full settlement of the first lien loan. In connection with the settlement, the Partnership recorded a $52,841 gain on extinguishment of mortgage loan investment, which represents the excess of the settlement amount over the net carrying amount of the mortgage loan investment and related accrued interest accounts. In accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), the measure of impairment for a loan restructured in a troubled debt restructuring is based on the present value of expected future cash flows discounted at the original contractual rate. Accordingly, upon the April 1994 modification, the Partnership measured the impairment of the mortgage loan investment and determined that an allowance for impairment was still required. The allowance for impairment was written off in March 1996, when the first lien loan was paid in full. Subsequent to the April 1994 modification, interest income was recorded at an interest rate that equated the expected future cash flows to the mortgage loan investment balance. The expected cash flows changed slightly from year to year. Additionally, any changes in the allowance for impairment that resulted from changes in the discount rate or passage of time were also recorded as interest income. This accounting treatment resulted in the recognition of $32,444 of interest income for the year ended December 31, 1996. The effective interest rate of this interest income was 10.8%. Interest income of $32,444 would have been recognized under the terms of the modification agreement for the year ended December 31, 1996, if the Partnership had not adopted SFAS 114. NOTE 6 - MORTGAGE LOAN INVESTMENTS - AFFILIATES - ----------------------------------------------- Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make nonrecourse mortgage loans to affiliates of the General Partner so long as such loans meet certain conditions, including that such loans bear interest at a rate equal to the prime lending rate of Bank of America plus 2.5%, or plus 3.5% if the loan is junior to other indebtedness. These loans are secured by revenue-producing real estate and may be either junior or senior to other indebtedness secured by such property. At December 31, 1998, the Partnership had one outstanding first priority mortgage loan investment to an affiliate of $1,306,488. For the year ended December 31, 1998, the Partnership recognized $414,070 of interest income related to affiliate loans. The following sets forth the Partnership's mortgage loan investments to affiliates of the General Partner at December 31, 1998 and 1997. Loans were funded by the proceeds from the mortgage note payable entered into in October 1992, the line of credit obtained in June 1995 (see Note 7 - "Revolving Credit Agreement") or other available funds. Interest only payments are due monthly. The monthly payment varies according to the prime lending rate.
Mortgage Annual Lien Interest December 31, Property Position Rate % (a) Maturity 1998 1997 - -------- --------- ---------- ----------- ------------- -------------- McNeil Pension Investment Fund, Ltd.: Brice Road Office Building First 11.00 05/98 $ - $ 411,062 Verre Center Office Building First 11.00 11/99 1,306,488 820,426 McNeil Real Estate Fund X, Ltd.: La Plaza Business Center First 11.00 02/00 - 3,136,029 McNeil Real Estate Fund XI, Ltd.: The Village Apartments First 11.00 11/99 - 2,588,970 ------------- ------------- $ 1,306,488 $ 6,956,487 ============= =============
(a) The loans bear interest at the prime lending rate of Bank of America plus 2.5% for senior priority loans and prime plus 3.5% for junior priority loans. The prime lending rate was 7.75% at December 31, 1998 and 8.5% at December 31, 1997. On May 1, 1992, the Partnership agreed to loan an aggregate of $1.115 million to McNeil Pension Investment Fund, Ltd. ("McPIF"), an affiliate of the General Partner, at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). A total of $483,364 was borrowed by McPIF pursuant to this commitment, $72,302 of which was repaid in 1997. This loan was secured by a first lien on Brice Road Office Building located in Reynoldsburg, Ohio. The original loan matured in May 1995, at which time a new loan under substantially the same terms was executed. On May 1, 1998, McPIF repaid the loan with proceeds received from a new loan from the Partnership secured by Verre Center Office Building, as discussed below. On October 25, 1996, the Partnership agreed to loan an aggregate of $1.68 million to McPIF at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). In 1996, $820,426 was borrowed by McPIF pursuant to this commitment. An additional $75,000 was borrowed in January 1998. McPIF borrowed an additional $411,062 in May 1998 and repaid the $411,062 mortgage loan investment secured by Brice Road Office Building located in Reynoldsburg, Ohio. This loan is secured by a first lien on Verre Center Office Building located in Chamblee, Georgia. Interest on the loan is payable monthly. Principal is payable in November 1999. On February 28, 1997, the Partnership loaned $2,336,029 to McNeil Real Estate Fund X, Ltd. ("Fund X"), at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). On August 1, 1997, the mortgage note was amended and the principal balance was increased by $800,000, for total borrowings from the Partnership of $3,136,029. Fund X used the $800,000 additional proceeds to repay the $800,000 mortgage loan investment secured by Lakeview Plaza Shopping Center, as discussed below. This loan was secured by a first lien on La Plaza Business Center located in Las Vegas, Nevada and was paid in full in June 1998. On August 15, 1994, the Partnership loaned $800,000 to Fund X at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). This loan was secured by a second lien on Lakeview Plaza Shopping Center located in Lexington, Kentucky. Interest on the loan was payable monthly, with principal originally due and payable in August 1997. On August 1, 1997, Fund X repaid the loan with proceeds received from a new loan from the Partnership secured by La Plaza Business Center, as discussed above. On October 25, 1996, the Partnership loaned $2,588,970 to McNeil Real Estate Fund XI, L.P. ("Fund XI") at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund XI in connection with borrowings from affiliates pursuant to Fund XI's partnership agreement). This loan was secured by a first lien on The Village Apartments located in Gresham, Oregon. This loan was paid in full in May 1998. In order to induce the Partnership to lend funds to the foregoing affiliates of the General Partner, the General Partner entered into agreements with the Partnership whereby the General Partner agreed to pay: (i) the difference between the interest rate required by the Partnership's Amended Partnership Agreement to be charged to affiliates (either prime plus 2.5% or prime plus 3.5%) and the interest rate actually paid by Fund X, Fund XI and McPIF to the Partnership (prime plus 1%), and (ii) all points (1.5% of the principal amount if a first priority security interest is obtained and 2% of the principal amount if a junior priority security interest is obtained), closing costs and expenses required to be received by the Partnership pursuant to the Partnership's Amended Partnership Agreement in connection with such affiliated financing arrangements. At December 31, 1998, 1997 and 1996, the General Partner had paid $19,557, $113,432 and $78,391, respectively, representing the aggregate amount of interest which would be owed for one year pursuant to this arrangement. In addition, the General Partner paid $62,761, $139,236 and $83,510 of interest, points, closing costs and expenses required to be received by the Partnership on all affiliate loans during 1998, 1997 and 1996, respectively. All other requirements for affiliated loans, as specified in the Partnership's Amended Partnership Agreement, were met at December 31, 1998, 1997 and 1996, in connection with these loans. A summary of activity for the mortgage loan investments - affiliates is as follows:
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Balance at beginning of year....... $ 6,956,487 $ 4,692,760 $ 2,235,902 Mortgage loans funded ............. 75,000 2,336,029 3,409,396 Mortgage loans repaid ............. (5,724,999) (72,302) (952,538) ----------- ----------- ----------- Balance at end of year ............ $ 1,306,488 $ 6,956,487 $ 4,692,760 =========== =========== ===========
Based on the lending rates prescribed by the Amended Partnership Agreement for each applicable affiliate, the fair value of mortgage loan investments-affiliates approximated book value at December 31, 1998 and 1997. The cost of the mortgage loan investments for Federal income tax purposes is the same as the carrying amount for financial statement purposes. NOTE 7 - REVOLVING CREDIT AGREEMENT - ----------------------------------- The following sets forth the revolving credit agreement of the Partnership at December 31, 1998 and 1997. The revolving credit agreement was secured by the related real estate investments.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position Rate % Maturity 1998 1997 - -------- ------------ ------ ---------------- -------------- ------------ Kendall Sunset, One Corporate Center I and One Corporate Center III First 9% (a) (a) 7/99 $ - $ 3,437,648 =========== ===========
(a) The interest rate and monthly payment varied based on the PNC Bank prime lending rate plus 1/2%. The rate listed above represents the rate in effect as of June 1998, when the loan was repaid. A $5 million revolving credit agreement was secured by the Partnership in June 1995. The Partnership had borrowed $3,437,648 under the revolving credit agreement at December 31, 1997. Any borrowings under the revolving credit agreement bore interest at prime plus one-half of one percent or a LIBOR-based rate, if so elected by the Partnership. The Partnership was required to pay a commitment fee equal to one-quarter of one percent per annum on any unused portion of the line of credit. Total commitment fees paid during 1998, 1997 and 1996 were $5,538, $3,887 and $12,708, respectively. In 1995, the Partnership incurred loan costs of $195,059 related to the line of credit. The line of credit, which originally expired in July 1997, was extended during 1997 to mature in July 1999 and was secured by One Corporate Center I and III office buildings and Kendall Sunset Mini-Storage. The line of credit contained financial covenants that required the Partnership to maintain an Interest Expense Coverage Ratio of 3:1, as defined, among other restrictions. The Partnership was in compliance with all financial covenants associated with the revolving credit agreement as of December 31, 1998 and 1997. The balance of the loan was paid in full in June 1998 and the revolving credit agreement was cancelled by the Partnership in March 1999. In February 1997, $2,336,029 was borrowed by the Partnership under the revolving credit agreement and loaned to an affiliate of the General Partner (see Note 6 - "Mortgage Loan Investments - Affiliates"). Based on borrowing rates currently available to the Partnership for long-term debt with similar terms and average maturities, the fair value of the revolving credit agreement borrowings approximated book value at December 31, 1997. NOTE 8 - REPURCHASE OF LIMITED PARTNERSHIP UNITS - ------------------------------------------------ Under the provisions of both the original partnership agreement and the Amended Partnership Agreement, the Partnership is required to repurchase Units in amounts totaling up to 0.6% of gross proceeds per year. The repurchase amount is equal to the lesser of 90% of adjusted invested capital, or $9 per Unit. Repurchase is based on written requests from limited partners submitted between October 1 and October 20 of each year. The requirement was first effective in 1989. In January 1999, 1998 and 1997, $332,928 was used each period to repurchase 36,992 Units each period for requests submitted in 1998, 1997 and 1996, respectively. NOTE 9 - LEGAL PROCEEDINGS - ---------------------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. NOTE 10 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described in Note 1 - "Organization and Summary of Significant Accounting Policies", Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. McNEIL REAL ESTATE FUND XXVII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
Costs Initial Cost Cumulative Capitalized Related Buildings and Write-down for Subsequent Description Encumbrances Land Improvements Impairment (a) To Acquisition - ----------- ------------ ---- ------------- --------------- -------------- MINI-STORAGE WAREHOUSES: AAA Sentry N. Lauderdale, FL $ - $ 69,890 $ 380,110 $ - $ 419,439 Forest Hill West Palm Beach, FL - 507,422 1,862,578 - 169,006 Fountainbleau Miami, FL - 285,854 864,146 - 574,558 Kendall Sunset Miami, FL - 672,000 3,808,000 - 150,220 Margate Margate, FL - 233,101 1,156,899 - 231,386 Military Trail West Palm Beach, FL - 568,405 1,681,595 - 196,005 OFFICE BUILDINGS: One Corporate Center I Edina, MN - 925,000 5,250,000 (1,300,000) 2,225,817 One Corporate Center III Edina, MN - 925,000 5,255,000 (1,300,000) 2,587,505 -------------- -------------- -------------- ------------ ------------- $ - $ 4,186,672 $ 20,258,328 $ (2,600,000) $ 6,553,936 ============== ============== ============== ============ ============= Assets Held for Sale (c): AAA Century Airport Inglewood, CA $ - Burbank Burbank, CA - -------------- $ - ==============
(a) The carrying values of One Corporate Center I and III Office Buildings were each reduced by $1,300,000 in 1991. (c) Assets held for sale are stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation and amortization cease at the time the assets are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
Gross Amount at Which Carried at Close of Period Accumulated Buildings and Depreciation Description Land Improvements Total (b) and Amortization - ----------- ---- ------------- --------- ---------------- MINI-STORAGE WAREHOUSES: AAA Sentry N. Lauderdale, FL $ 70,337 $ 799,102 $ 869,439 $ (279,130) Forest Hill West Palm Beach, FL 510,780 2,028,226 2,539,006 (691,111) Fountainbleau Miami, FL 287,114 1,437,444 1,724,558 (428,035) Kendall Sunset Miami, FL 672,756 3,957,464 4,630,220 (1,313,096) Margate Margate, FL 233,575 1,387,811 1,621,386 (486,230) Military Trial West Palm Beach, FL 571,715 1,874,290 2,446,005 (649,719) OFFICE BUILDINGS: One Corporate Center I Edina, MN 925,000 6,175,817 7,100,817 (2,921,088) One Corporate Center III Edina, MN 925,000 6,542,505 7,467,505 (3,388,473) -------------- -------------- --------------- ------------- $ 4,196,277 $ 24,202,659 $ 28,398,936 $ (10,156,882) ============== ============== =============== ============= Assets Held for Sale (c): AAA Century Airport Inglewood, CA $ 1,913,276 Burbank Burbank, CA 2,700,110 ---------------- $ 4,613,386 ================
(b) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-39 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $36,691,467 and accumulated depreciation was $7,919,529 at December 31, 1998. (c) Assets held for sale are stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation and amortization cease at the time the assets are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
Date of Date Depreciable Description Construction Acquired Lives (Years) - ----------- ------------ -------- ------------- MINI-STORAGE WAREHOUSES: AAA Sentry N. Lauderdale, FL 1987 10/90 5-25 Forest Hill West Palm Beach, FL 1985 08/90 5-25 Fountainbleau Miami, FL 1987 11/90 5-25 Kendall Sunset Miami FL 1986 10/90 5-25 Margate Margate, FL 1985 10/90 5-25 Military Trial West Palm Beach, FL 1986 08/90 5-25 OFFICE BUILDINGS: One Corporate Center I Edina, MN 1979 12/89 5-25 One Corporate Center III Edina, MN 1980 12/89 5-25 Assets Held for Sale (c): AAA Century Airport Inglewood, CA 1987 09/90 Burbank Burbank, CA 1987 09/90
(c) Assets held for sale are stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation and amortization cease at the time the assets are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVII, L.P. Notes to Schedule III Real Estate Investments and Accumulated Depreciation and Amortization A summary of activity for the Partnership's real estate investments and accumulated depreciation and amortization is as follows:
For the Years Ended December 31, ----------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Real estate investments: Balance at beginning of year ................... $ 27,437,308 $ 32,563,740 $ 32,023,668 Improvements ................................... 961,628 720,137 540,072 Reclassification to assets held for sale ....... -- (5,846,569) -- ------------ ------------ ------------ Balance at end of year ......................... $ 28,398,936 $ 27,437,308 $ 32,563,740 ============ ============ ============ Accumulated depreciation and amortization: Balance at beginning of year ................... $ 8,806,732 $ 8,674,792 $ 7,046,093 Depreciation and amortization .................. 1,350,150 1,432,871 1,628,699 Reclassification to assets held for sale ....... -- (1,300,931) -- ------------ ------------ ------------ Balance at end of year ......................... $ 10,156,882 $ 8,806,732 $ 8,674,792 ============ ============ ============ Assets Held for Sale: Balance at beginning of year ................... $ 4,549,881 $ -- $ -- Reclassification to assets held for sale ....... -- 4,545,638 -- Improvements ................................... 63,505 4,243 -- ------------ ------------ ------------ Balance at end of year ......................... $ 4,613,386 $ 4,549,881 $ -- ============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURES --------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows: Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Robert A. McNeil, 78 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband Co-Chairman of the Robert A. McNeil, of McNeil Investors, Board Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Ron K. Taylor 41 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983. Each director shall serve until his successor shall have been duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1998, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1998. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, was known by the Partnership to own more than 5% of the Units, other than the General Partner, as noted in (B) below. (B) Security ownership of management. The General Partner and the officers and directors of its general partner, collectively own 670,634 limited partnership units, which represents 13% of the outstanding limited partnership units at February 1, 1999. (C) Change in control. None ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of general partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $30 per gross square foot for mini-storage warehouses and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. For the year ended December 31, 1998, the Partnership paid or accrued $614,793 of such asset management fees. Until March 13, 1991, the Original General Partner was entitled to receive, out of cash from operations, a performance incentive fee equal to 20% of all points received by the Partnership on mortgage loans if the Unit holders receive distributions of cash from operations equal to a 10% cumulative noncompounding annual return on their original capital investment. Such fees were cumulative and were accrued in the years earned and are to be paid when conditions are met. Conditions for payment have not yet been met and, at December 31, 1998, $141,647 of amounts accrued in prior years are included in payable to affiliates on the Balance Sheets. The Partnership pays property management fees equal to 5% of the gross rental receipts of mini-storage properties (6% for commercial) to McREMI, an affiliate of the General Partner, for providing property management services. Additionally, the Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1998, the Partnership paid or accrued $796,591 of such property management fees and reimbursements. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Note 2 - "Transactions With Affiliates." Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make loans to affiliates of the General Partner, so long as such loans meet certain conditions, including that such loans bear interest at a rate of either prime of Bank of America plus 2.5% or prime plus 3.5%, depending on whether the security for such loans is first priority or junior priority. On May 1, 1992, the Partnership agreed to loan an aggregate of $1.115 million to McNeil Pension Investment Fund, Ltd. ("McPIF"), an affiliate of the General Partner, at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). A total of $483,364 was borrowed by McPIF pursuant to this commitment, $72,302 of which was repaid in 1997. This loan was secured by a first lien on Brice Road Office Building located in Reynoldsburg, Ohio. The original loan matured in May 1995, at which time a new loan under substantially the same terms was executed. On May 1, 1998, McPIF repaid the loan with proceeds received from a new loan from the Partnership secured by Verre Center Office Building, as discussed below. On October 25, 1996, the Partnership agreed to loan an aggregate of $1.68 million to McPIF at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). In 1996, $820,426 was borrowed by McPIF pursuant to this commitment. An additional $75,000 was borrowed in January 1998. McPIF borrowed an additional $411,062 in May 1998 and repaid the $411,062 mortgage loan investment secured by Brice Road Office Building located in Reynoldsburg, Ohio. This loan is secured by a first lien on Verre Center Office Building located in Chamblee, Georgia. Interest on the loan is payable monthly. Principal is payable in November 1999. On February 28,1997, the Partnership loaned $2,336,029 to McNeil Real Estate Fund X, Ltd. ("Fund X"), at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). On August 1, 1997, the mortgage note was amended and the principal balance was increased by $800,000, for total borrowings from the Partnership of $3,136,029. Fund X used the $800,000 additional proceeds to repay an $800,000 mortgage loan investment secured by Lakeview Plaza Shopping Center. This loan was secured by a first lien on La Plaza Business Center located in Las Vegas, Nevada. The loan was paid in full in June 1998. On October 25, 1996, the Partnership loaned $2,588,970 to McNeil Real Estate Fund XI, L.P. ("Fund XI") at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund XI in connection with borrowings from affiliates pursuant to Fund XI's partnership agreement). This loan was secured by a first lien on The Village Apartments located in Gresham, Oregon. The loan was paid in full in May 1998. In order to induce the Partnership to lend funds to affiliates of the General Partner, the General Partner entered into agreements with the Partnership whereby the General Partner agreed to pay: (i) the difference between the interest rate required by the Partnership's Amended Partnership Agreement to be charged to affiliates (either prime of Bank of America plus 2.5% or 3.5%) and the interest rate actually paid by Fund X, Fund XI and McPIF to the Partnership (prime plus 1%), and (ii) all points (1.5% of the principal amount if a first priority security interest is obtained and 2% of the principal amount if a junior priority security interest is obtained), closing costs and expenses required to be received by the Partnership pursuant to the Partnership's Amended Partnership Agreement in connection with such affiliated financing arrangements. At December 31, 1998, the General Partner had paid $19,557, representing the aggregate amount of interest which would be owed for one year pursuant to this arrangement. In addition, the General Partner paid $62,761 of interest, points, closing costs and expenses required to be received by the Partnership on all affiliate loans during 1998. In connection with these loans, all other requirements for affiliated loans, as specified in the Partnership's Amended Partnership Agreement, were met. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ------------------------------------------------------------------ See accompanying Index to Financial Statements at Item 8 - Financial Statements and Supplementary Data. (A) Exhibits Exhibit Number Description -------- ----------- 4.2 Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXVII, L.P. (incorporated by reference to the Current Report of the registrant on Form 8-K dated March 30, 1992, as filed on April 10, 1992). 10.1 Assignment of Partnership Advances dated March 13, 1991 between Prime Plus Corp. and McNeil Partners, L.P. (incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1990, as filed on March 29, 1991.) 10.3 Promissory Note dated November 25, 1996 between McNeil Real Estate Fund XXVII, L.P. and Village Fund XI Associates Limited. (1) 10.4 Promissory Note dated November 25, 1996 between McNeil Real Estate Fund XXVII, L.P. and McNeil Pension Investment Fund, Ltd. (1) 10.5 Property Management Agreement dated March 30, 1992, between McNeil Real Estate Fund XXVII, L.P. and McNeil Real Estate Management, Inc. (2) 10.6 Amendment of Property Management Agreement dated March 5, 1993, by McNeil Real Estate Fund XXVII, L.P. and McNeil Real Estate Management, Inc. (2) 10.10 Revolving Credit Loan Agreement dated June 21, 1995, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. (3) 10.11 Consolidated, Amended and Restated Revolving Credit Note dated June 21, 1995, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. (3) 10.12 First Amendment to Revolving Credit Loan Agreement dated June 21, 1997, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. 10.13 First Amendment to Consolidated, Amended and Restated Revolving Credit Note dated June 21, 1997, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. 11. Statement regarding computation of net income per hundred limited partnership units (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies"). (1) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1996, as filed on March 28, 1997. (2) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1992, as filed on March 30, 1993. (3) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1995, as filed on March 29, 1996. (B) Reports on Form 8-K. There were no reports on Form 8-K filed by the Partnership during the quarter ended December 31, 1998. McNEIL REAL ESTATE FUND XXVII, L.P. A Limited Partnership SIGNATURE PAGE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McNEIL REAL ESTATE FUND XXVII, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 31, 1999 By: /s/ Robert A. McNeil - -------------- ---------------------------------------------- Date Robert A. McNeil Chairman of the Board and Director Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 31, 1999 By: /s/ Ron K. Taylor - -------------- ---------------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 31, 1999 By: /s/ Carol A. Fahs - -------------- ---------------------------------------------- Date Carol A. Fahs Vice President of McNeil Investors, Inc. (Principal Accounting Officer) EX-27 2
5 12-MOS DEC-31-1998 DEC-31-1998 2,844,032 0 178,537 0 0 0 28,398,936 (10,156,882) 27,841,371 0 0 0 0 0 25,958,341 27,841,371 9,135,799 9,737,197 3,990,033 5,340,183 1,415,058 0 166,866 2,815,090 0 2,815,090 0 0 0 2,815,090 0 0
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